Of course, this could just be a little breather ahead of greater highs on markets. But, there is a strong case to be made for caution.
For Eoin Murray, head of investments at Hermes Investment Management, the fact that – for the sixth month in a row – the proportion of bullish advisors has remained at a level that would normally suggest that defensive measures should be taken is a strong counter indicator.
“So much of the future direction of the US market now seems to rest on the ability of the incoming Trump administration to deliver on campaign pledges,” he said.
“Policy uncertainty and investor sentiment are set to dominate market news headlines (see figure 1). Our principal metrics for capturing event risk, the Turbulence Index and the Absorption Ratio, both indicate that markets are less fragile than in recent quarters. However, with increasing policy uncertainty in the UK and around the globe, we err on the side of caution. In our view, event risk is greater to the downside,” he said.
For AXA Investment Managers’ Chris Iggo, while macro drivers might remain a dominant market theme for some time, as it will take time for any policies to show up in the economic data, valuations can move much more quickly than fundamentals.
“It will be interesting to see how markets react to even higher rates, tighter spreads and increased equity market levels,” he said, pointing out: “The more risk premiums are reduced the less cushion there is for investors when sentiment changes. A narrative for the current market is that pro-growth sentiment is outweighing the unpredictability of the Trump approach to government and valuations are reflecting that more and more. The next big challenge is to adjust your portfolio to anticipate the change in sentiment and the commensurate adjustment in valuations,” he wrote on Friday.
Iggo questioned whether or not Trumpisms would be enough to derail the risk rally, but pointed out “we have heard enough since the inauguration to convince us that there will be plenty of opportunity for something that is said or tweeted to rattle market sentiment.”
